- Open Macroeconomics, International Finance, Macroeconomics, Applied Econometrics
- Capital controls, Macroprudential policies
- Exchange rate determination
- Purchasing Power Parity Puzzle
- International Trade
Job Market Paper
- "Capital Controls and Foreign Exchange Market Intervention"
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The current small open economy models based on the classical Mundell's trilemma are unable to explain the coexistence of capital controls and volatile exchange rates, which has become a robust feature in emerging market economies. The paper presents a novel theoretical approach by extending the standard New Keynesian small open economy model by building upon the Gali-Monacelli and Farhi-Werning frameworks. I create an environment where the policymaker can decide the level of exchange rate regimes - instead of a binary choice, fixed or floating - in response to external shocks. I further assume that breaking the peg signals the country's economic instability, which raises the country's risk premium. Under this set-up of the model, the floating exchange rate regime may not welfare-dominate the capital controls any longer because loosening/losing the controls over exchange rates may expose households to an additional risk premium. The simulation results show that the coexistence of managed float and capital controls becomes optimal. Furthermore, this additional friction has a multiplying effect, which makes exchange rates stabilization important to prevent a bigger welfare loss. It also captures that optimal capital controls indirectly manage exchange rate depreciation, which allow policymakers to put less resources to stabilize the exchange rates.
- "Revisiting PPP Puzzle: Nominal Exchange Rate Rigidities"
Even though real exchange rates may converge to parity in the long run, the consensus emerging from an extensive literature appears to be that the rate of mean-reversion is slow. Rogoff (1996) talks of a consensus view of a half-life between 3-5 years; however, this is much too long to be compatible with arbitrage - hence, Rogoff argues, the "PPP puzzle." This paper first proposes that investigating the periods of de facto floating regime will explain seemingly unrealistic persistence in real exchange rates by presenting lower persistence in real exchange rates than the estimates of previous studies, which include the periods de facto fixed regime in their data set by using de jure regimes. Secondly, previous studies have included the periods when real exchange rates that are already close to the mean; because the trend of mean-reversion rates is non-linear, including the periods when real exchange rates are already converged to their means will bias the estimates toward zero, which are translated to the slow mean-reversion in real exchange rate estimates. Therefore, unbiased mean-reversion estimates can be estimated if I investigate the periods when the sample countries are under de facto float regimes and the periods when real exchange rates are statistically far from their means. Studying the data of nineteen goods CPI for eleven countries confirms these propositions. The MG-CCE estimation decreases the half-life by 28.26% (half-life of 23.14 months) compared to fixed-effects estimation. The exchange rates regime dummy decreases the half-life estimate to 19.81 months and the already-stable dummy decreases the estimates to 15.22-20.54 months. Using both dummy variables elicits the results that make the puzzle less puzzling; the half-life estimates are 9.30-13.89 months.
- "Cost of Floating Exchange Rates: Should we fear to float?"
This paper quantitatively explores the exchange rates regime-elastic risk premium. The developing countries had managed the stable exchange rates until 1997 as the exchange rate volatility brings in volatility to the price levels. Meanwhile, the advocates of floating exchange rates regime argue that fixed regimes result in sluggish growth economy. Since 1998 more emerging market economies have adopted floating regimes, and one can ask whether the choice of exchange rates regime affects macroeconomic growth and stability. This paper takes foreign investor's perspective and studies how the trend of risk premium changes when the regime switches in ten emerging market economies through the event study framework. Using a daily data set, the events of de facto regime switching are identified following the comparable methodology used in Calvo and Reinhart (2002), and EMBI+ is used as a proxy for country risk. The results confirm that switching exchange rates regimes from fixed to floating incurs an abrupt increase in average risk premium. EMBI+ rises by 141.11-165.48 basis points (0.257-0.525 standard deviations) around the events and shows 205.72-340.30 basis points of 40-day average difference before and after the events.
- Primary Advisor: Professor Kenneth M. Kletzer
- Dissertation Reading Committee
- Professor Kenneth M. Kletzer (Chair)
- Professor Carl E. Walsh
- Professor Michael M. Hutchison